Netflix’s Black Friday

Reed Hastings
Photo by Sylvain Lefevre/Getty
Matthew Belloni
January 23, 2022

Sssh, don’t say this too loudly. What if, just maybe—this is tough—but maybe, stay with me… Netflix is just a regular old entertainment company? I know, that’s blasphemy. Entertainment? What? That’s the Business That Must Not Be Named. Netflix, of course, is a technology company—a truly global, algorithmically driven, product-first engagement machine. It might produce and distribute what Hollywood people call “movies” and “television shows,” but to the stock market, the content is merely a $15 billion a year annoyance. The Netflix platform—and its seemingly unending growth, thanks to its first-mover position in streaming—is what has driven the sky-high valuation.   

Not anymore. This week’s wild stock slide—down 20 percent in a day to below $400 a share, and off about 40 percent since the high of nearly $700 just two months ago—is more than merely a correction, or part of an overall NASDAQ retrenchment. Netflix’s subscriber miss and, most alarming, its forecast of just 2.5 million new subs for the current quarter, pissed all over its growth narrative. Instead, with 222 million members, Netflix is now—gasp—a maturing media company, with all the pros and cons that entails. “For now, we’re staying calm,” co-C.E.O. Reed Hastings said. Few investors joined in his serenity.

The company’s worst stock drop in a decade is certainly a big deal, so it’s no surprise that the Netflix bears immediately came out of hibernation. That includes the Hollywood traditionalists who have watched in horror as the Los Gatos interloper used its vaulting stock price to remake the industry in its image, devaluing content with its always-on firehose, killing talent backends, maiming movie theaters and the cable bundle, and convincing stars like Leo DiCaprio and Jennifer Lawrence to happily appear in what Spielberg called “TV movies.” Everyone cashes the Netflix checks, of course, but there’s always been a tinge of distrust around town, like maybe co-C.E.O. Ted Sarandos, in his fancy sports car, is driving everyone off a cliff. The stock sell-off has reinforced those doubts.  

Netflix caused the entire industry to reorient itself around streaming, yet analyst Michael Nathanson reminded us Friday that the dominance of that model is not preordained. “There’s probably more risk than people realize” he warned on CNBC. Netflix has spent to grow like no outlet in the history of entertainment. But if it added only 8.3 million subscribers in a quarter where it released a crazy-sounding 157 original movies, TV series and new seasons of existing series, according to Wedbush Securities, what might happen if it doesn’t spend like that? And what chances of success are there for everyone else releasing less? Streaming may be the future, but it’s a far tougher business than cable television, which is bundled and difficult to churn in and out. Plus, “the streaming model doesn’t allow those franchises to be built,” Nathanson noted. “There’s a quick decay.”

Comments like that are what drove down Disney (7 percent), Discovery (5 percent) and other media stocks in the Netflix fallout zone. Hastings also admitted that “added competition may be affecting our marginal growth some.” In other words, if everyone eats into everyone else’s numbers, we all suffer, and this whole endeavor needs to be questioned.

Scary stuff. But the Netflix apocalypse, while very real if you are a recent investor, is likely more of a market problem than an actual business problem. I’m not an equities expert, but perhaps a company shouldn’t trade at 95 times its earnings? Maybe Netflix is just an entertainment company, one without a diversified business, so perhaps it shouldn’t have been valued more than the Walt Disney Co? Netflix may have pushed a narrative that it was a tech giant all along, but the market went along willingly. And now, as the Journal noted, “the company’s investors still need to figure out how to price it for a different kind of growth.”

Still, even with a slower trajectory, the Netflix business hasn’t changed, and its fundamentals are pretty solid. Streaming is television, television is one of the best businesses in media history, and Netflix is the global leader in streaming television.  Pretty simple. Does anyone think it won’t be a player long term? Plus, those 222 million members, while huge, leaves room for growth, even if sluggish, and the company is aggressively chasing new customers in markets like Korea and India, where it’s considerably ahead of its competitors. So besides not growing fast enough for market analysts, what’s the problem?

Netflix may have positioned itself with Big Tech, and it helped make Hastings and Sarandos very rich, but they have been acting more and more like media managers. Their growth in the U.S. and Canada is pretty tapped out at 75 million subs, so they raised prices in the U.S., just like those evil cable companies that have strong revenue per user. They now have to worry about competition for eyeballs from Disney, WarnerMedia, and the others, so they are spending on originals to distinguish the content. Their top content executives mostly hail from traditional media companies, like NBC and Universal. They’re diversifying into video game publishing and consumer products and, on the horizon, theme parks. Hell, Netflix is even cash flow positive this year, just like the majors. 

All of this portends a long, bright future for Netflix. It may not grow like Amazon or Facebook, and yes, the streaming wars are about to get ugly, with many casualties. But becoming the Disney of the 21st century is hardly a consolation prize.